U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2002
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission File No. 0-32331
SURETY HOLDINGS CORP.
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(Name of Small Business Issuer in its Charter)
Delaware 52-2229054
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State of other jurisdiction of (IRS Employer
incorporation or organization Identification No.)
850 Fort Plains Road
Howell, New Jersey 07731
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(Address of Principal Executive Offices)
Registrant's telephone number including area code 732-886-0706
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports,
and (2) has been subject to such filing requirements for the past 90 days.
(1) YES X NO (2) YES X NO
--- --- --- ---
State the number of shares outstanding of each of the Registrant's classes of
common equity, as of the latest applicable date:
6,738,000 - - May 15, 2002
SURETY HOLDINGS CORP. AND SUBSIDIARY
INDEX
PAGE
Part I - Financial Information
Item 1 - Condensed Consolidated Financial Statements
Balance Sheet as of March 31, 2002 1
Statements of Income for Three Months Ended March 31, 2002 and 2001 2
Statements of Cash Flows for Three Months Ended March 31, 2002 and 2001 3
Notes to the Financial Statements 4-7
Item 2 - Management's Discussion and Analysis or Plan of Operation 8-14
Part II - Other Information
Item 1 - Legal Proceedings 15
Item 2 - Change in Securities 15
Item 3 - Defaults Upon Senior Securities 15
Item 4 - Submission of Matters to a Vote of Security Holders 15
Item 5 - Other Information 15
Item 6 - Exhibits and Reports on Form 8-K 15
SIGNATURE 16
SURETY HOLDINGS CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2002
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash $ 10,312,000
Real estate held for sale, current 2,438,000
Other current assets 182,000
-------------
Total current assets 12,932,000
NOTES RECEIVABLE, less current maturities 1,537,000
REAL ESTATE HELD FOR SALE 36,704,000
NOTES RECEIVABLE AND ACCRUED INTEREST,
MARINE FOREST RESORT, INC., net of a $7.2
million allowance for loan losses. 3,814,000
REAL ESTATE DEVELOPMENT COSTS 36,164,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $1,909,000 3,195,000
DEFERRED TAX ASSET 3,475,000
-------------
$ 97,821,000
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, current maturity $ 30,000
Notes payable, president, including accrued
interest of $3,600 224,000
Accounts payable 253,000
Accrued expenses and other current liabilities 143,000
-------------
Total current liabilities 650,000
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LONG-TERM LIABILITIES,
Notes payable, less current maturity 428,000
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.001 par value,
200,000,000 shares authorized,
6,738,000 shares issued and
outstanding 7,000
Capital in excess of par value 101,678,000
Accumulated deficit (4,942,000)
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Total stockholders' equity 96,743,000
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$ 97,821,000
=============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
1
SURETY HOLDINGS CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
2002 2001
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REVENUES $ 945,000 $ 275,000
COST OF REVENUES 415,000 159,000
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GROSS PROFIT 530,000 116,000
GENERAL AND ADMINISTRATIVE
EXPENSES 394,000 391,000
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INCOME (LOSS) FROM OPERATIONS 136,000 (275,000)
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OTHER INCOME (EXPENSE)
Interest income 74,000 328,000
Interest expense (13,000) (13,000)
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61,000 315,000
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INCOME BEFORE INCOME TAXES 197,000 40,000
INCOME TAXES (49,000) (16,000)
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NET INCOME $ 148,000 $ 24,000
============= ==============
NET INCOME PER COMMON
SHARE, basic and diluted $ 0.02 $ nil
============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, basic and diluted 6,738,000 6,738,000
============= =============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
SURETY HOLDINGS CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 148,000 $ 24,000
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 38,000 36,000
Deferred income taxes 45,000 16,000
Accrued interest receivable,
Marine Forest Resorts, Inc. (226,000)
Gain on sales of property (675,000)
Loss on sale of notes receivable 79,000
Increase (decrease) in cash
attributable to changes in operating
assets and liabilities:
Other current assets (34,000) (91,000)
Accounts payable (185,000) 60,000
Accrued expenses and other
current liabilities 16,000 (39,000)
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NET CASH USED IN OPERATING ACTIVITIES (568,000) (220,000)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (27,000) (80,000)
Proceeds from sales of property 710,000
Real estate development expenditures (387,000) (616,000)
Proceeds from repayments of notes receivable 838,000 451,000
Advances to Marine Forest Resort, Inc. (1,700,000)
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,134,000 (1,945,000)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on mortgage
notes payable and bank line of credit (7,000) (2,000)
Proceeds from notes payable, president 95,000
Repayments of notes payable, president (155,000)
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NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (162,000) 93,000
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NET INCREASE (DECREASE) IN CASH 404,000 (2,072,000)
CASH
Beginning of year 9,908,000 10,147,000
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End of year $ 10,312,000 $ 8,075,000
============= ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
SURETY HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Surety Holdings Corp. ("Surety") and its wholly-owned subsidiary, Surety Kohala
Corporation ("Kohala") (collectively, the "Company") is primarily engaged in the
development of a property on 642 acres of land in the North Kohala district of
Hawaii Island in the state of Hawaii. This development, referred to as the
Mahukona development project (see Note 3), was initially slated to be a hotel,
18-hole golf course and resort homes. However, the Company is exploring other
avenues of development for the 642 acres most notably, an all-inclusive
fractional interest club community.
The current operations of the Company include the sale of its non-Mahukona
development project real estate and other ancillary activities, all of which are
not deemed to be the future of the Company's business.
2. UNAUDITED STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UNAUDITED STATEMENTS
The accompanying condensed consolidated financial statements of Surety Holdings
Corp. and Subsidiary as of March 31, 2002 and for the three months ended March
31, 2002 and 2001 are unaudited and reflect all adjustments of a normal and
recurring nature to present fairly the consolidated financial position, results
of operations and cash flows for the interim periods. These unaudited condensed
consolidated financial statements have been prepared by the Company pursuant to
instructions to Form 10-QSB. Pursuant to such instructions, certain financial
information and footnote disclosures normally included in such financial
statements have been omitted.
These unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated audited financial statements and notes
thereto, together with management's discussion and analysis or plan of
operations, contained in the Company's Annual Report on the Form 10-KSB for the
year ended December 31, 2001. The results of operations for the three months
ended March 31, 2002 are not necessarily indicative of the results that may
occur for the year ending December 31, 2002.
INCOME PER COMMON SHARE
The Company complies with Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share" which requires dual presentation of basic and
diluted earnings per share. Basic earnings per share excludes dilution and is
computed by dividing income available to common stockholders by the
weighted-average common shares outstanding for the year. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Since the Company has no securities or other contracts to issue common
stock, basic and diluted net income per common share for the three-month periods
ended March 31, 2002 and 2001 were the same.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of Surety
and Kohala. All significant intercompany transactions and balances have been
eliminated in consolidation.
4
SURETY HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. REAL ESTATE DEVELOPMENT COSTS
At March 31, 2002, real estate development costs, attributed primarily to the
Company's Mahukona development project, consist of the following:
Land and land acquisition costs $ 23,896,000
Planning and studies 2,091,000
Egineering and architectural 551,000
Infrastructure 6,032,000
Professional and consulting fees 2,183,000
Other 1,411,000
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$ 36,164,000
============
4. STOCKHOLDERS' EQUITY
In February 2002, the Company's board of directors authorized a three-for-one
stock split effected in the form of a 200 percent stock dividend which was
distributed on February 15, 2002 to stockholders of record on February 4, 2002.
Stockholders' equity has been restated to give retroactive recognition to the
stock split for all periods presented by reclassifying from capital in excess of
par value to common stock the par value of the additional shares arising from
the split. In addition, all references in the condensed consolidated financial
statements to number of shares and per share amounts have been restated.
5. COMMITMENTS AND CONTINGENCIES
The prior approvals obtained for the Mahukona development project are
conditional; that is, each approval is subject to various conditions of
approval. Certain of these conditions of approval contain time limits or
financial compliance requirements, which if not met, may ultimately result in
legislative and/or administrative actions to void or revoke the prior approvals.
The effect of such adverse actions would be to return the land entitlements to
the former zoning, or more appropriate zoning as determined by the County of
Hawaii. The Company believes that it has continued to maintain the prior
approvals through compliance with all applicable conditions. In the future,
however, the Company may not be able to maintain compliance with all applicable
conditions.
The Company has entered into various consulting agreements for investment
banking, project development and other services.
The Company is involved in certain legal actions that arose in the normal course
of business. In the opinion of the Company's management, the resolution of these
matters will not have a material adverse effect on the condensed consolidated
financial position, results of operations or cash flows of the Company.
6. RELATED PARTY TRANSACTIONS
PRESIDENT
From time to time, the Company's President advances the Company monies pursuant
to one-year 5% promissory notes. At March 31, 2002, the amount owed to the
Company's President pursuant to such notes was approximately $224,000. Related
interest expense for the three months ended March 31, 2002 and 2001 is
approximately $4,000 and $3,000, respectively.
5
SURETY HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. RELATED PARTY TRANSACTIONS (CONTINUED)
MARINE FOREST RESORT, INC. ("MARINE FOREST")
Pursuant to uncollateralized promissory notes, the Company advanced Marine
Forest, a related Japanese corporation that owns approximately 400 acres of land
in Okinawa, Japan, $9.75 million. The notes bear interest at the U.S. prime
rate, at date of issuance, plus one percent. Under their original terms, the
notes were due six months after date of issuance, extended an additional six
months and subsequently extended to December 31, 2002, as a concession to Marine
Forest to advance Marine Forest's development projects. In connection therewith,
the Company continues to discuss the possibility of a strategic arrangement with
Marine Forest, including the Company acquiring Marine Forest. However, the
parties are waiting the completion of the revised Mahukona development plan
(expected in the second quarter of 2002) to further its discussion in this
regard. Related interest income for the three months ended March 31, 2001 is
approximately $226,000. In 2002, the Company discontinued accruing interest
income on the promissory notes in light of its 2001 impairment charge (see next
paragraph). Through March 31, 2002, no interest has been paid, however
management anticipates that all accrued interest receivable will be reclassified
to principal and settled in connection with the parties' contemplated strategic
arrangement.
At December 31, 2001, in light of the speculative nature of Marine Forest's
contemplated development projects among other reasons and in accordance with its
compliance with the requirements of SFAS No. 114, the Company recorded an
impairment charge of approximately $7.2 million.
OTHER
During the three months ended March 31, 2002 and 2001, the Company rented
properties to related individuals for aggregate annual rentals of approximately
$10,000 and $20,000, respectively.
Subsequent to March 31 2002, the Company sold property and improvements thereon
to Kohala's President for approximately $575,000.
7. SEGMENT REPORTING
As discussed in Note 1, the Company's primary business focus is the Mahukona
development project. Nonetheless, the Company complies with SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information", which
provides information about the Company's current business activities. Management
has divided the Company into the following segments: real estate sales, rental,
cattle sales and other. Transactions between segments are not common and are not
material to the segment information. Some business activities that cannot be
classified in the aforementioned segments are shown under "corporate".
Operating results, by segment, for the three months ended March 31, 2002 and
2001 are as follows (in thousands):
6
SURETY HOLDINGS CORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. SEGMENT REPORTING (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2002
Real Estate Rental Cattle
Sales Activity Sales Other Corporate Total
----------------------------------------------------------------------------
Total revenues $ 710 $ 99 $ 81 $ 55 $ - $ 945
Total cost of revenues 270 28 48 69 415
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Segment profit (loss) 440 71 33 (14) 530
General and administrative expenses (394) (394)
Interest income and other, net 61 61
Income taxes (49) (49)
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Net income (loss) $ 440 $ 71 $ 33 $ (14) $ (382) $ 148
============================================================================
Total assets $ 40,679 $ 53 $ 106 $ 1,039 $ 55,944 $ 97,821
============================================================================
Capital expenditures $ - $ - $ - $ 27 $ 387 $ 414
============================================================================
Depreciation and amortization $ - $ 1 $ 4 $ 18 $ 15 $ 38
============================================================================
THREE MONTHS ENDED MARCH 31, 2001
Real Estate Rental Cattle
Sales Activity Sales Other Corporate Total
----------------------------------------------------------------------------
Total revenues $ - $ 131 $ 88 $ 56 $ - $ 275
Total cost of revenues 14 41 45 59 159
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Segment profit (loss) (14) 90 43 (3) 116
General and administrative expenses (391) (391)
Interest Income, net 315 315
Income taxes (16) (16)
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Net income (loss) $ (14) $ 90 $ 43 $ (3) $ (92) $ 24
============================================================================
Total assets $ 42,478 $ 2,040 $ 842 $ 204 $ 54,631 $100,195
============================================================================
Capital expenditures $ - $ 7 $ - $ 69 $ 620 $ 696
============================================================================
Depreciation and amortization $ - $ 2 $ 2 $ 17 $ 15 $ 36
============================================================================
7
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NOTE ON FORWARD-LOOKING INFORMATION
This Form 10-QSB contains certain forward-looking statements. For this purpose,
any statements contained in this Form 10-QSB that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, words such as "may," "will," "expect," "believe," "anticipates,"
"estimates," or "continue" or comparable terminology or the negative thereof are
intended to identify certain forward-looking statements. These statements by
their nature involve substantial risks and uncertainties, both known and
unknown, and actual results may differ materially from any future results
expressed or implied by such forward-looking statements. The Company undertakes
no obligation to publicly update or revise any forward-looking statements
whether as a result of new information, future events or otherwise.
OVERVIEW
Surety Holdings Corp. (the "Company"), through its wholly-owned subsidiary,
Surety Kohala Corporation ("Surety Kohala") (formerly Chalon International of
Hawaii, Inc.), is engaged in the development of a property on 642 acres of land
in the North Kohala district of Hawaii Island in the state of Hawaii. This
development, referred to as the Mahukona development project, was initially
slated to be a hotel, 18-hole golf course and resort homes. However, the Company
is exploring other avenues of development for the 642 acres most notably, an
all-inclusive fractional interest club community (see MAHUKONA DEVELOPMENT in
Liquidity and Capital Resources).
The current operations of the Company (discussed below) include the sale of its
non-Mahukona development project real estate and other ancillary activities,
many of which are not deemed to be the future of the Company's business.
RESULTS OF OPERATIONS
The following table sets forth the statements of income of the Company for the
years ended March 31, 2002 and 2001:
8
2002 2001
Real estate sales $ 710,000 $ -
Rentals 99,000 131,000
Cattle sales 81,000 88,000
Other 55,000 56,000
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Total revenues 945,000 275,000
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Cost of real estate sales 270,000 14,000
Cost of rentals 28,000 41,000
Cost of cattle sales 48,000 45,000
Cost of other 69,000 59,000
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Total cost of revenues 415,000 159,000
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Gross profit 530,000 116,000
General and administrative expenses 394,000 391,000
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Income (loss) from operations 136,000 (275,000)
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Interest income 74,000 328,000
Interest expense (13,000) (13,000)
Income taxes (49,000) (16,000)
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12,000 299,000
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Net income $ 148,000 $ 24,000
============= ============
REAL ESTATE SALES -
During the three months ended March 31, 2002, the Company sold two properties
for proceeds of $710,000. During the same period of the prior year there were no
sales of real estate due to survey delays. Real estate sales for both periods
have been impacted due to delays caused by the Company's survey company, the
largest survey company on the Big Island of Hawaii and probably the only survey
company large enough to handle the Company's PCRS (Parcel Consolidation
Re-Subdivision) parcels and subdivisions, being backlogged with work. This
surveying backlog is a result of increasing demand of the Company's North Kohala
property in a favorable economic time. Further, many of the properties the
Company is selling have never been surveyed and the topography and terrain are
very difficult for surveyors. To address the backlog, the Company recently
switched surveyors on several projects. Once the surveyors have finished,
certain parcels that are subject to the land court system go through the land
court process (generally three months).
The events of September 11, 2001, ("September 11th") contributed to a slow down
in the tourism and second home markets. However, the Company believes these
markets are gradually recovering and at March 31, 2002, the Company has
approximately fifty-seven contracts to sell land consisting of approximately
3,000 acres for proceeds of approximately $31 million. As of date hereof, the
obstacles discussed in the preceding paragraph bottleneck a majority of these
contracts. Further, the Company is awaiting the results of the Company's appeal
of the County's new Planning Director's initiative to condition certain PCRS
with additional requirements. A draft settlement has been submitted to the
Planning Director and he should have a decision by late May 2002.
9
RENTAL REVENUES -
The decrease in rental revenue and related margins is attributable to the sale
of real estate formerly leased by the Company. Throughout 2002, the Company
expects this trend to continue.
CATTLE SALES -
The approximate 8% decrease in cattle sales is attributable to a
difficult-to-predict beef market. Cattle sales declined to 281 heads in the
three months ended March 31, 2002, down from 333 heads in the three months ended
March 31, 2001. The deteriorated cattle sales margin is attributable to the
fixed cost nature of the cattle sales operations. Processes and tasks such as
branding, culling, moving, fence repairs, medicine and labor costs are required
regardless of sales. The Company anticipates that 2002 annual cattle revenues
will approximate 2001 annual cattle revenues.
OTHER REVENUES -
Other revenues experienced no significant change in 2002 as compared to 2001.
However, margins for other revenues fell during 2002 as a result of an increase
in depreciation expense. The Company anticipates 2002 other revenues to surpass
2001 other revenues due to recovery from September 11th induced downturn.
GENERAL AND ADMINISTRATIVE EXPENSES -
General and administrative expenses for the three months ending March 31, 2002
remained relatively consistent with the same period of 2001. The components of
general and administrative expenses for 2002 include salaries and related costs
of approximately $108,000; professional fees (legal, auditing and consulting) of
approximately $90,000; franchise and other taxes of approximately $70,000;
depreciation of approximately $15,000; insurance of approximately $36,000 and
other expenses aggregating approximately $75,000. The components of general and
administrative expenses for 2001 include salaries and related costs of
approximately $145,000; professional fees (legal, auditing and consulting) of
approximately $97,000; franchise and other taxes of approximately $76,000;
depreciation of approximately $15,000 insurance of approximately $15,000; and
other expenses aggregating approximately $43,000.
OTHER INCOME AND EXPENSE -
Decreased interest income during the first quarter of 2002 is directly
attributable to the Company discontinuing accrual of such income in light of its
2001 impairment charge and compliance with the requirements of Statements of
Financial Accounting Standards ("SFAS") No 114.
10
LIQUIDITY AND CAPITAL RESOURCES
Cash flows
For the three months ended March 31, 2002 and 2001, the Company's net cash used
in operating activities of approximately $568,000 and $220,000, respectively, is
comprised of the following:
2002 2001
Net income $ 148,000 $ 24,000
Depreciation and amortization 38,000 36,000
Deferred income taxes 45,000 16,000
Accrued interest receivable, Marine Forest (226,000)
Net gain on sales of property
and notes receivable (596,000)
Changes in operating assets
and liabilities (203,000) (70,000)
----------- -----------
$ (568,000) $ (220,000)
=========== ===========
For the three months ended March 31, 2002 and 2001, the Company's net cash
provided by (used in) investing activities of approximately $1,134,000 and
($1,945,000), respectively, is comprised of the following:
2002 2001
Capital expenditures including
real estate development $ (414,000) $ (696,000)
Proceeds from sales of property 710,000
Proceeds from notes receivable 838,000 451,000
Advances to Marine Forest (1,700,000)
------------ -------------
$ 1,134,000 $ (1,945,000)
============ =============
11
Approximately $387,000 of the $414,000 of the 2002 capital expenditures was made
to progress the Company's Mahukona development endeavors. These expenditures
include approximately $76,000 for land-clearing, leveling and grading,
approximately $78,000 of professional fees including consulting, approximately
$218,000 for design, engineering and surveying and $15,000 of other. As
previously discussed, in 2002, the Company sold two properties for the total
proceeds of $710,000, whereas in 2001 there were no sales of real estate.
Increased proceeds from notes receivable are primarily attributable to the sale
of notes to a bank resulting in a loss of $79,000 on conversion. During the
three months ended March 31, 2001, the Company continued to advance Marine
Forest monies pursuant to short-term promissory notes. No monies were advanced
to Marine Forest during the three months ended March 31, 2002 (see separate
liquidity discussion on pages 13 and 14).
For the three months ended March 31, 2002 and 2001, the Company's net cash
provided by (used in) financing activities of approximately ($162,000) and
$93,000, respectively, is comprised of the following:
2002 2001
Debt proceeds (from President) $ - $ 95,000
Repayment of debt (to President) (155,000)
Debt repayments (7,000) (2,000)
---------- --------
$ (162,000) $ 93,000
========== ========
As of March 31, 2002, the Company has total current assets of approximately
$12.9 million and total current liabilities of approximately $0.7 million or a
working capital of approximately $12.2 million. As previously discussed, the
Company anticipates 2002 revenue levels to be higher than levels experienced
during 2001. However, given the Company's anticipated cash requirements to
complete the revised Mahukona development project and plans to execute a
strategic arrangement with Marine Forest (both discussed below), future capital
raising or debt financing activities may be required
In an effort to increase the marketability of the Company's common stock, among
other reasons, in February 2002, the Company's board of directors authorized a
three-for-one stock split effected in the form of a two hundred percent stock
dividend which was distributed on February 15, 2002 to stockholders of record on
February 4, 2002.
MAHUKONA DEVELOPMENT
As previously discussed, the events of September 11th had an impact on tourism
and hence, temporarily curtailed the Company's development activities. However,
the Company believes that the tourist market and the high-end second home market
are gradually recovering. In this regard, the Company has resumed its
development strategies however it has focused on a revised plan for the 642
acres of land in the North Kohala district of Hawaii Island in the state of
Hawaii (known as the Mahukona development project). As previously reported, the
plan for this valuable parcel of land was the development of a hotel, 18-hole
golf course and resort homes. However, the Company recently hired several
consultants, with extensive experience in high-end resort development and
marketing, to reassess its development strategy with respect to Mahukona
property, the goal of which is to provide the Company guidance in determining an
effective development strategy that will optimize the property's economic
potential.
12
The preliminary assessment of the consultants for the Mahukona property is the
development of an all-inclusive fractional interest club community structured as
an undivided interest ("UDI"). A UDI would allow the prospective buyer to use
the Mahukona facility plus the eco-ranch lands and would provide an ownership
interest in both. A UDI would not allow the prospective buyer to own a specific
parcel of land, but only a fraction of each square foot of property. The revised
Mahukona development project is subject to further Company and consultant review
and analysis that is expected to be completed during the second quarter of 2002.
Based on the preliminary assessment of its consultants, the revised Mahukona
development project cost (excluding ongoing costs and maintenance) would be
approximately $93 million and completed substantially over a three-year period.
Based on information provided by its consultants, the Company anticipates the
timing and details of the $93 million to be as follows (in thousands):
YEAR 1 YEAR 2 YEAR 3
INITIAL INFRASTRUCTURE AND DEVELOPMENT COSTS
Infrastructure (roads, water, sewer, etc.) $ 10,000 $ 10,000 $ 10,000
Golf course, range, clubhouse, etc. 10,000 10,000
Tennis complex 1,000
Central lodge facility (lobby, restaurants, etc.) 10,500
Beach club 10,000
Recreational trails/improvements 500 500
Ranch Improvements/amenities 500 2,000 1,000
Club boats / marina improvements 1,500 1,000
Other amenities/improvements 2,000
Entrance/gatehouse 500
Design, permits, engineering
contingency 3,075 7,200 2,012
-------- -------- --------
$ 23,575 $ 55,200 $ 14,512
======== ======== ========
The Company recognizes that its current operations will not be sufficient to
fund the cost of Mahukona's development and it may not be successful in future
capital raising or debt financing activities. Accordingly, the Company is
exploring other financing strategies including, but not limited to, a 50% joint
venture with development partners, including, but not limited to, another
property development company, a fractional facility management company or
private investors.
MARINE FOREST
As disclosed in the Company's prior public filings, the Company has advanced
funds to Marine Forest, a related Japanese corporation that owns approximately
400 acres of land in Okinawa, Japan, in which it is developing pursuant to a
"golf resort" theme. Funding of $9.75 million was used by Marine Forest
primarily in the construction of a golf course and related amenities. The
Company anticipated interest payments to commence on or about December 31, 2001.
However, such interest payments were contingent upon Marine Forest's ability to
start the sales of its golf memberships. These sales were postponed and
development (construction) activity was temporarily suspended as a result of the
events of September 11th.
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The Company continues to discuss the possibility of a strategic arrangement with
Marine Forest including, but not limited to, the Company acquiring Marine
Forest, which Marine Forest has orally agreed to. However, the parties are
waiting the completion of the revised Mahukona development plan (expected in the
second quarter of 2002) to further its discussion in this regard. Based on its
discussion with Marine Forest management, the Company believes that Marine
Forest will piggyback the Company's "all-inclusive fractional ownership" concept
contemplated for Mahukona
Through March 31, 2002, no interest has been paid to the Company, however
management anticipates that all accrued interest receivable will be reclassified
to principal and settled in connection with the parties' contemplated strategic
arrangement previously discussed.
At December 31, 2001, in light of the speculative nature of Marine Forest's
contemplated development projects among other reasons and in accordance with its
compliance with the requirements of SFAS No. 114, the Company has recorded an
impairment charge of approximately $7.2 million. The Company will continue to
review impairment by applying the procedures set forth in SFAS No. 114. If
there's a significant change in the amount or timing of the impaired loan's
expected future cash flow, the Company will adjust (upward or downward) the
valuation allowance.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
There have been no material changes in legal proceedings as required to be
reported on Form 10QSB from as previously reported in the Company's 10-KSB for
the fiscal year ended December 31, 2001.
Item 2. Change in Securities
In February 2002, the Company's board of directors authorized a three-for-one
stock split effected in the form of a 200 percent stock dividend which was
distributed on February 15, 2002 to stockholders of record on February 4, 2002.
Item 3. Defaults Upon Senior Securities:
None
Item 4. Submission of Matters to a Vote of Security Holders:
None
Item 5. Other information:
None
Item 6. Exhibits and Reports on Form 8-K:
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SURETY HOLDINGS CORP.
(Registrant)
By: /s/ Howard R. Knapp
-----------------------
Howard R. Knapp
Chief Financial Officer
Dated: May 15, 2002
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